Saturday, January 4, 2014

Sociomantic is Berlin's hidden champion (interview)

Sociomantic

Berlin's "hidden champion" is actually not that difficult to find. In their office in the trendy Berlin district of Kreuzberg, they sit in close proximity to big German startup names like Mymuesli, SumUp and Epic Companies.

And yet, Sociomantic's development and growth has hardly been noticed in the startup world. The company has grown to more than 160 employees in 15 offices across four continents. This year, the Sociomantic team plans on expanding to 30 offices and 300 employees. Their clients include eCommerce giants like Rakuten, Zalando and Dafiti, and Sociomantic has even managed to woo several executives away from dream-employer Google - in fact, almost 10 percent of its workforce are former Google employees, including CEO Jason Kelly. From August 2012 to August 2013, the company announced it made more than $100 million in revenues.

Just four years ago, Sociomantic only consisted of three founders, a vague business idea and zero funding. What lifted founders Thomas Nicolai, Lars Kirchhoff and Thomas Brandhoff to success was the technology that Nicolai and Kirchhoff developed as part of their PhD in St. Gallen. Back then, it was all about providing a big data analysis of social networks - the same concept that Facebook now uses in its Social Graph. And it was about understanding and building the infrastructure to manage the kind of big data assets made possible by the Internet.

It was at Berlin-based online marketing network Zanox that Nicolai met Sociomantic's third founder, Thomas Brandhoff. He was tasked with improving the operational and financial development of the company - no easy task. The initial idea of matching results from social network analyses with the customer databases of companies like BMW or Audi failed due to data privacy concerns. In the months following, they pursued - and discarded - three other business ideas, until they finally came up with an online marketing concept of providing a demand-side platform for real-time bidding.

With this, Sociomantic found its market niche that lead it to success within just a few years - without ever taking external investments. Yet, even in its home city of Berlin, the startup remains a hidden champion. Why? And what enabled Sociomantic to grow? In this interview, the founders tell their story for the first time.

EVEN IN THE STARTUP SCENE ITSELF, SOCIOMANTIC IS LITTLE KNOWN. YOU'VE BEEN VERY MODEST WHEN IT COMES TO MARKETING AND PUBLIC RELATIONS - WHY IS THAT?

BRANDHOFF: This was a very conscious decision. We could have invested the money differently.

NICOLAI: We did not go to the typical Berlin startup events. That's not where our clients are, and at some point you simply know everyone already. Instead, we wanted to get momentum and build our product. But, of course, it was also a question of money. And seeing ourselves in the media would not have served any purpose except flattering our egos. PR is not an indicator of business success. Aside from that, let's not forget that the companies in our market have a lot of money, which makes competition tough. If you want to survive in such a market, you shouldn't go to the battlefield too early. So we decided to hide in the woods for a bit.

ONLINE ADVERTISING IS A FIERCELY COMPETITIVE MARKET. CONSIDER ME AN AMATEUR: WHAT'S REAL-TIME BIDDING? WHAT DOES A DEMAND-SIDE PLATFORM DO?

BRANDHOFF: Real-time bidding describes the process of auctioning banner (display) impressions in real-time. When a user comes to a website, there's a real-time auction for ad space taking place the moment the browser loads the page. We then ask: Do we know this user? What do we already know about him? Which banner size works best at this time of day on this website? With this information, we calculate our bid. Same thing as on eBay: I bid one Euro, my competitor bids 50 cents, so I win the auction for 51 cents. If we win the auction, then we must consider: Which banner works best on this publisher site at this time for this user? Then we track whether the banner was seen or clicked, and whether this led to a transaction, a lead, or a sale.

NICOLAI: We always compare it to high-frequency trading. Today, everything there happens in real time, too. And we act as the broker, so to say, acting on a variety of different exchanges and ad market places on behalf of our clients.

AND YOUR CLIENTS ARE THE ADVERTISERS?

NICOLAI: Exactly. We only work in the interest of the advertiser. In the past, this was a problem with many ad networks because they had relationships with clients on both the advertiser and the publisher side. In that case, you never know in which interest they are actually working - in the interest of the publishers, their own interest, or in the interest of the advertiser? We position ourselves on one side only. And our clients have full transparency into our business model. Many of our American competitors don't do this, and may have higher margins in the short-term. But our approach is more sustainable for long-term relationships with our clients.

WHO ARE YOUR COMPETITORS?

BRANDHOFF: Other demand-side platforms like Mediamath or RocketFuel, but also Google and Adobe, of course. And there are companies who aim at similar budgets, like Criteo.

HOW DO YOU EXPLAIN TO POTENTIAL CLIENTS WHY THEY SHOULD WORK WITH YOU?

BRANDHOFF: Our customers look at two things: do we meet their goals in terms of budget efficiency, and do we deliver enough transactions and sales. To really explain how we are performing better in the bidding process is theoretically possible, but it is very difficult to demonstrate to a client in a half-an-hour conversation. That's why most clients have us run a test campaign first.

BACK IN 2009, YOU STARTED WITH ONLY 3,000 EUROS, AND YOU NEVER ACCEPTED EXTERNAL INVESTMENTS. WHY IS THAT? WAS THAT ALWAYS THE PLAN?

NICOLAI: We never actually decided to do so. But what we did decide is that if we take money from an investor, we want to have a proven business model. It so happened that whenever we were ready to work with an investor, the company had another leap in sales. To be frank, in many cases the investors were too slow - not deal-driven, not hungry, not daring enough. In the early days Martin Sinner told us: "Guys, if you really believe in your business, go to a bank. Take out a loan and then go full throttle." In our second year, we did just that: each of us took out a loan in his own name.

BRANDHOFF: We always had enough liquid assets, but we wanted to cover our backs in case a client didn't pay.

NICOLAI: That was a lot of money for each of us, more than a mid-range car. But it was the right thing to do. Others might have chosen an investor as the next step. But a bank is also faster - after two weeks, you're all set. With an investor it can easily take half a year. That's why today we still have no investors.

FOR SOCIOMANTIC, 2011 WAS THE YEAR OF EXPANSION - FIRST IN EUROPE, THEN IN THE U.S., NOW ALL OVER THE WORLD. THAT MUST HAVE BEEN VERY CAPITAL-INTENSE.

NICOLAI: Yes, that's true. But you can do it, even as a startup. It takes hard work, clean finances and modesty. Modesty in everything. At one stage, we had 34 people working in an office of less than than 100 square metres. Before that, we were nine people sharing 20 square metres.

The thing is that every wrong decision I make in the beginning will cost me a lot of money later on, while every right decision I make will pay off in the end. That's sustainability. If you pace yourself in the beginning, you can take more risks later when you need to. However, networking is also crucial. We've grown from four to 15 offices within one year, that doesn't happen out of the blue. Our time with Zanox was absolutely essential. We didn't just hire head hunters to go get the McKinsey folks on board, but trusted in people we knew and respected.

YOU RECENTLY HIRED THREE TOP EXECUTIVES FROM GOOGLE - ROBERT BOSCH, MAHESH NARAYANAN UND ROHIT KUMAR - THAT DIDN'T HAPPEN BY ACCIDENT EITHER, DID IT?

NICOLAI: Almost ten percent of our current employees have worked for Google before. It's one of the platforms we bid on, so they see what we're up to. Over time it has become easier to attract people, and at some point it was like a pull.

GOOGLE RANKS AS A TOP EMPLOYER. WHY WOULD ANYONE WANT TO LEAVE THEM?

NICOLAI: Sales people in particular often feel like their job does not meet their expectations in terms of professional development. As for developers, they like to work on products that change the world. At some point, this doesn't happen anymore.

ABOUT ONE YEAR AGO, YOU NAMED JASON KELLY - ALSO AN EX-GOOGLER - YOUR CEO. THAT'S A PRETTY UNUSUAL DECISION. DID YOU ALWAYS KNOW THAT YOU WOULD STEP DOWN AS LEADERS AT SOME POINT?

NICOLAI: Actually, this decision was made before we even founded the company. Back then, Thomas and I traveled to Switzerland to meet with Lars. We wandered through the Appenzell, and on a beautiful day on the Hirschberg, we made two important decisions. First, there must be one person who has the final say. Entrepreneurship is not about democracy. That's a fact, unfortunately. You need to be able to decide quickly.

AND WHO HAS THE FINAL SAY?

NICOLAI: That's not important. In every phase of our work it was someone else. The second decision was that if we get to a point where we think that someone else can do the job better, then we should give up our ego and let someone else take over. In this case, doing a better job means to strengthen the company and its employees, and to create and secure jobs. Aside from that, every phase of creating a business requires different types of people as leaders. A good example is Google and Eric Schmidt. It can work out very well, as long as it is harmonic and respectful. But you also have to be willing to learn. We wanted to build a company in which there's simply no space for ego.

WHAT ROLE DO THE FOUNDERS PLAY NOW?

NICOLAI: At the moment we are still busy filling several management positions. But over time our role has evolved from operative to representative and communication-focused functions. For our employees, contact with the founders is very important. The bigger a company is, the more communication is needed. This is a lesson we had to learn. Jason had a big influence on us here and made it clear that we have to set aside more time for this. There are many developments that you can foresee - structures, finances, technology - but these sort of soft aspects are more difficult to predict.

DOES IT HURT SEEING SOMEONE ELSE MAKING THE DECISIONS? FOR EXAMPLE, BECAUSE YOU MIGHT HAVE TO GO BACK ON SOME OF THEM?

NICOLAI: No, so far we haven't gone back on anything. Of course there are different opinions, but that's perfectly normal. It has more to do with progress. Even if the CEO would want to revert a decision, then it would be okay because it would be made in the interest of our shareholder value and enterprise value. On the other hand, what makes a good manager is the ability to also be cooperative and open-minded, instead of stubborn and self-focused.

YOU NOW HAVE 160 EMPLOYEES IN 15 OFFICES. WHAT'S NEXT?

NICOLAI: We want to grow to 300 employees within the next twelve months.

BRANDHOFF: That means: We want to hire, we're looking for good people.

NICOLAI: We just opened an office in Sweden. Now we're off to Asia and South America. We want to go from 15 to 30 offices worldwide. In America we'll soon have 40, 50 people. Right now, innovation, product management and technology are almost completely in Berlin. In the future, there will be a shift to the U.S. Innovations need to be on site. Without Jason we actually would have steered clear of America - just as Rocket Internet did. There's a lot of competition in that market. At Zanox, the expansion into the U.S. failed miserably. In our case it has turned out well because we had the right people.

THIS EXPANSION WILL COST A LOT OF MONEY. ARE EXTERNAL INVESTMENTS STILL OUT OF THE QUESTION?

NICOLAI: You can never exclude anything completely. But at the moment we're planning to do it with our own cash flow.

WHAT ARE YOUR LONG-TERM GOALS? AN IPO?

NICOLAI: For us, it has always been important to create something sustainable at a global scale. We wanted to prove that technology made in Berlin is just as good as technology made in Silicon Valley. Today I think we succeeded in this. And we're having a lot of fun getting it further. Whether this will end up in an IPO or something else, we don't know yet. We'll see. What's important to us is that our people have fun here. Because it's challenging. And because it's one of the few projects in this city that are operating at such a scale. I guess there's no other project in Berlin - maybe not even in Germany - that processes a comparable data volume per day. That's motivating.

BRANDHOFF: We're still young.

NICOLAI: We're all in our best age, in our early or mid thirties. We still have time. This is a marathon, not a sprint.

THERE'S A RUMOR THAT SOCIOMANTIC IS VALUED AT 250M TO 300M. IS THERE SOME TRUTH IN THAT?

NICOLAI: I get these phone calls every day: you're talking to them, them, and them. That's complete nonsense. We'd rather keep our heads down and let people talk. Does it help us find more clients? No. Does it help us provide better service? No. No matter if Sociomantic is worth X, Y or Z - we have already achieved way more than we ever could have imagined. That was hard work. We paid for it with health, friends and family.

Yes, we happened to be in the right market at the right time with the right technology. But we also delivered results and kept going. We had 16- to 18-hour-days. And you should never forget where you come from. All three of us are from Eastern Germany. We know what it used to look like. We appreciate the success and know what it means. What's more important to us is that our people are happy working here, and that we can give them the feeling of being part of something meaningful. If it was just about the money, we could have sold the company three years ago. That would have been lucrative, too, and it would have been way less stressful.